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What are the pitfalls of NRAS?

Written on the 11 June 2013 by James Cagney

What is the National Rental Affordability Scheme (NRAS)?

NRAS is a Government program that will pay you tax free money for 10 years after purchase of n new investment property. The Australian Government has given this to assist to alleviate the huge shortage of rental housing on a national level and has created the National Rental Affordability Scheme, called “NRAS”.

The NRAS program is designed to focus on affordable housing and not social housing. The government is well aware of the previous problems created through public housing schemes and does not want to repeat the problems of the past.

The Government has enlisted the support of the public sector to ensure the most favourable outcomes. It’s doing this by providing substantial incentives to property investors. These incentives can be as much as $103,500 over a ten year period.

The Government has now confirmed its commitment to funding incentives for 35,000 NRAS properties. With the recent floods in Queensland and NSW has forced the federal government to announced that NRAS funding is to be partially diverted for rebuilding damaged houses. This has now reduced the overall NRAS allocation by 15,000 houses and $264 million. How long this will last before the scheme has reached its full allocation is the unknown.

We have talked to numerous NRAS investors achieving many more benefits over and above all that is currently available for them that negatively gear. This is an opportunity for
investors to get in quick before the scheme is sold out.

What can the NRAS investors receive?

NRAS offers annual incentives for 10 years. There are two key components.

(1) A Federal Government Incentive is indexed to inflation for 10 years at 1st May 2013 is $7,763 per dwelling as a refundable tax offset or payment.

(2) A State or Territory Government Tax Free Incentive indexed to inflation for 10 years at the 1st May 2013 is $2,587 per dwelling for the year. The incentive is given annually on the condition that throughout the ten year period the dwelling is rented at 20% below the market rent to eligible lower and moderate-income households.

The Federal and State or Territory Tax incentives total $10,350. The rent component, weighted average of eight capital cities is 3.7% for 2013 – 2014. If the weighted index continues at this rate you will receive approximately $103,500.00 over 10 years. The beauty of this is that the Federal Government incentive is a tax offset not a tax deduction. A tax offset is better because it is a direct reduction in the tax payable whereas a tax deduction is a reduction in the taxable income, which is then taxed. The State Government incentive is also tax free.

NOTE: The NRAS Incentive is indexed according to movements in the Rents component of the Housing Group Consumer Price Index for the year, December quarter to December quarter as at 1 March, using the weighted average rate of eight capital cities housing component, and is effective from 1 May 2013.

The Federal Government tax offset is a refundable tax offset. Whilst most tax offsets can only reduce your tax payable to zero, according to the Australian Tax Office, “refundable tax offsets can reduce the amount of tax you are liable to pay to an amount less than zero, which results in a refundable amount”. Therefore under NRAS, the State and Federal Governments are contributing by way of cash and a refundable tax offset or payment. So the investors rent out their property through the NRAS scheme giving a 20% discount on rent, the incentive in 2012 - 2013 financial year equates to $10,350 tax-free. The value of the incentive is adjusted yearly in accordance with the rent portion of CPI using the weighted average of the eight capital cities across Australia in any given year.

The data will then be forwarded to the relevant government agencies and after the annual audit is completed, you as the investor will be issued with your NRAS Tax Offset Certificate in June each year (for ten years) which you will use to claim your Federal Government Tax Offset through your tax return. Your State Government NRAS Tax-free payment will be paid at the end of September each year (for ten years).

What are the pitfalls to look out for?

Investors need to be aware that when borrowing for the NRAS property NRAS properties not all Banks will treat NRAS as standard security. This is because NRAS properties are rented at a minimum of 20% below market rent. This can reduce how much you can borrow from the banks, and this is why you need a qualified person to assess your financial situation and approach the right lender.

Many NRAS properties are often approved in areas of lower household income and your capital growth potential will be retarded. Developers have found a way to offload their land in these lower income areas. Always look for capital growth first rather than focusing only on as tax reducing programs before you buy an investment property.

NRAS was developed to reduce rents for the lower to middle income earners Too many NRAS properties in one suburb will affect the capital growth potential of the entire area. Although the scheme was introduced to reduce rents for lower to moderate income families pressed by high rents this does affect the perception of the neighbourhood by future investors, There are areas in all cities that are predominantly rental and these suburbs have never been high capital growth areas.

To Summarize….

The benefits of investing in an NRAS Approved Property are:

• Increased income through the Commonwealth and State / Territory incentives
• The growth in the property value over the 10 years
• Negative gearing income tax benefits using full deduction of interest payments and property depreciation
• Good opportunity for a positive cash flow
• Tax Free income indexed to inflation for 10 years
• Tax Offsets indexed to inflation for 10 years

How do you get started?

(1) Contact us and we will complete a quick qualification assessment to see if you are eligible for NRAS. Call James Cagney on 0416 137 645 or email: jfc@jamescagney.com.au .

(2) A qualified consultant will call or visit you to fully discuss your current situation of how an NRAS property may be of benefit to you.

(3) We will source a NRAS property for you that have both capital growth potential as well as the tax incentives. This is important properties need to value to the asking price and clients become very disappointed if their property is not approved by their bank. All NRAS properties have to be brand new.

(4) We assist you after the property has settled. We will assist with the property management and review your returns and situation every 12 months.